Thursday, July 31, 2008

Recession - Q4 07?

U.S. Recession May Have Begun in Last Quarter of 2007 (Update2)
By Timothy R. Homan

July 31 (Bloomberg) -- The U.S. economy may have tipped into a recession in the last three months of 2007 as consumer spending slowed more than previously estimated and the housing slump worsened, revised government figures showed.

The world's largest economy contracted at a 0.2 percent annual pace in the fourth quarter of last year compared with a previously reported 0.6 percent gain, the Commerce Department said today in Washington. Growth for the period from 2005 through 2007 was also trimmed.
The revisions now reinforce measures such as employment and production that already signaled the economy was shrinking. The National Bureau of Economic Research, the Cambridge, Massachusetts-based arbiter of economic cycles, defines a recession as a ``significant'' decrease in activity over a sustained period of time. The declines would be visible in GDP, payrolls, production, sales and incomes.

``We're in a recession,'' Allen Sinai, chief economist at Decision Economics Inc. in New York, said in a Bloomberg Television interview. ``It's going to widen, it's going to deepen.''

The government also said incomes grew less than previously thought, raising the risk that consumer spending will again stumble after getting a temporary boost from the tax rebates last quarter.

Previous Contraction
The prior time the economy shrank was in the third quarter of 2001 during the last recession, when it contracted at a 1.4 percent pace. Growth from January through March was revised down to a 0.9 percent pace from 1 percent. Initial jobless claims increased by 44,000 to 448,000 in the week ended July 26, from a revised 404,000 the prior week, the Labor Department said.
The revisions of growth are part of the government's annual adjustments to gross domestic product based on additional information from surveys and Internal Revenue Service data.
For 2005, growth was cut to 2.9 percent from 3.1 percent, and the rate of expansion for 2006 was reduced to 2.8 percent from 2.9 percent. The economy grew 2 percent last year, down from a previously reported 2.2 percent.

Nine of the 13 quarters under review were revised down, three increased and one was unchanged.

The largest downward revision was for the last three months of 2007, as the previously reported 2.3 percent gain in consumer spending was reduced by more than half, to 1 percent. Americans cut back on the use of electricity and gas as fuel bills soared.

Upward Swing
The largest upward swing, from 3.8 percent to 4.8 percent, was for the second quarter of last year.

The figures also showed the housing slide that began in 2006 was worse than previously thought. Residential investment fell 32 percent in the two years ended in December 2007, compared with a prior estimate of 29 percent.

The popular definition of a recession -- two consecutive quarters during which the economy shrinks -- isn't always fulfilled.

``While everyone focuses on GDP, keep in mind that it is not the only barometer of economic activity,'' David Rosenberg, chief North American economist at Merrill Lynch & Co. in New York, said in a July 28 note to clients. Growth ``is subject to huge historical revisions.''

The four other factors that the NBER takes into account, Rosenberg said, peaked between October 2007 and February 2008. The NBER usually declares a recession has started between six to 18 months after it's begun, according to its Web site.

Less Income
American workers also earned less in the last two years than the government previously estimated. Employee compensation was reduced by $69 billion, or 0.9 percent, in 2007. Figures for wages and for benefits were reduced about equally. The reduction in benefits reflected smaller contributions by employers to health insurance plans.

The income reduction for last year was smaller than the drop in the spending estimate, leading to an increase in the savings rate to 0.6 percent from 0.5 percent.

In contrast, companies did better than previously thought for all three years. Corporate profits were boosted by $75 billion for 2005, by $115 billion for 2006, and by $47 billion last year.
There was little change on the inflation front. The price measure tied to consumer spending rose 3.5 percent in the fourth quarter of 2007 compared with the same period the prior year, up 0.1 percentage point from the prior estimate. Excluding food and fuel, the Federal Reserve's preferred measure, it rose 2.2 percent, also 0.1 percentage point higher.

To contact the reporter on this story: Timothy R. Homan in Washington at Last Updated: July 31, 2008 09:12 EDT